Securities Industry Commentator by Bill Singer Esq

December 20, 2022





Joseph Gunnar & Co. Hit With About $1.55 Million FINRA Arbitration Award In Commissions Dispute

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FINRA the self-regulatory-organization apparently examined Citigroup Global Markets Inc. the FINRA Large Member firm during 2008 through 2022 because the regulator cited the firm's Reg SHO aggregation misconduct in three AWC settlements. Notably, the fines increased in each ensuing AWC. At some point, FINRA has to have an epiphany, however, that simply ratcheting up each ensuing fine on CGMI and other Large Member Firms doesn't accomplish anything. At best, the fines are an inconvenience for the violators. At worst, they are of no consequence. When it comes to Small Member Firms and the industry's hundreds of thousands of associated persons, FINRA selects sanctions seemingly designed to inflict pain. For the industry's big boys, well, y'know, it's more in the fashion of charging a modest toll on Wall Street.

READ the FULL TEXT Consent Order In the Matter of Wells Fargo Bank, N.A. (CFPB Admin. Proc. File No. 2022-CFPB-0011)

The Consumer Financial Protection Bureau (Bureau) has identified the following violations of law at Wells Fargo Bank, N.A. (Respondent): (i) with respect to auto loan servicing, Respondent incorrectly applied loan payments, erroneously imposed certain fees and charges, incorrectly repossessed customers' vehicles, and failed to refund certain unearned fees on debt cancellation products; (ii) with respect to home mortgage servicing, Respondent incorrectly denied mortgage loan modifications to certain qualified borrowers; and (iii) with respect to consumer deposit accounts, Respondent improperly froze or closed customer accounts, improperly charged certain overdraft fees, and did not always waive monthly account service fees consistent with its disclosures. Since 2020, Respondent has accelerated corrective actions and remediation, including to address these violations. Under §§ 1053 and 1055 of the Consumer Financial Protection Act of 2010 (CFPA), 12 U.S.C. §§ 5563, 5565, the Bureau issues this Consent Order.

Former Rochester Man Going To Prison For More Than 20 Years For His Role In Ponzi And COVID-19 Fraud Schemes (DOJ Release)
In the United States District Court for the Western District of New York, Christopher A. Parris, 42, was convicted of conspiracy to commit mail fraud and wire fraud; and he was sentenced to serve 244 months in prison and ordered to pay approximately $106-million dollars in restitution. As to the who, what, when, where, and why's of Parris fall from grace they are not amenable to a brief summarization; and, as such, consider this extended extract from the DOJ Release:

The Ponzi Scheme

Between January 2011 and June 2018, Parris conspired with co-defendant Perry Santillo and others to obtain money through an investment fraud, commonly known as a Ponzi scheme. Specifically, in 2007, Parris and Santillo, as equal partners, formed a business known as Lucian Development in Rochester. Prior to approximately July 2007, Lucian Development raised millions of dollars from investors in Rochester, and elsewhere, by soliciting investments for City Capital Corporation, a business operated by Ephren Taylor. In July 2007, Parris and Santillo were advised by Ephren Taylor that their investors' money had been lost. In response, in August 2007, Parris and Santillo agreed to acquire the assets and debts of City Capital Corporation. The acquisition proved financially ruinous, with the amount of the acquired debt far exceeding the value of the acquired assets. Taylor was later prosecuted and convicted of operating a Ponzi scheme.

Subsequently, Parris and Santillo chose not to disclose the truth to investors that their money, entrusted to Lucian Development for investment in City Capital Corporation, was gone. Instead, Parris and Santillo continued to solicit ever-increasing amounts of money from new investors in an unsuccessful attempt to recoup the losses. In order to find potential investors to solicit and defraud, Parris and Santillo purchased businesses from established investment advisors or brokers who were looking to exit their businesses. Between approximately 2008 and September 2017, Parris and Santillo, using money obtained from prior investors, purchased the businesses of at least 15 investment advisors or brokers, located in Tennessee, Ohio, Minnesota, Nevada, California (five businesses), Florida, South Carolina (two businesses), Texas, Pennsylvania, Maryland and Indiana.

The investment offerings pitched by Parris and Santillo consisted principally of unsecured promissory notes and preferred stock issued by various entities controlled by Parris and Santillo. Potential investors were offered an apparent array of investment options to create the illusion of a diversified investment portfolio. Those investment options included products issued by purported issuers such as First Nationle Solutions (FNS), Percipience Global Corporation, United RL Capital Services, Boyles America, Middlebury Development Corporation and NexMedical Solutions, among others. None of these issuers had substantial bona fide business operations or used investor money in the manner and for the purposes represented to investors. To the extent that an issuer may have had some minor legitimate business activities, it was not profitable, and insufficient revenues were generated to pay investors any returns (let alone return the principal amounts of their investments).

Over the years, to keep the Ponzi scheme from being detected, a substantial portion of incoming new investor monies were depleted by making promised interest and other payments to earlier investors. Most of the rest of incoming investor money was used by Parris, Santillo and other co-conspirators to finance lavish lifestyles of the conspirators, their families and associates; to expand the scheme by purchasing investment advisor/brokerage businesses to obtain access to fresh investors; and to pay operating expenses - salaries for a sales force and administrative staff, office rents and related expenses, housing for employees, and interest on loans - all of which were used to keep the scheme going and maintain a façade of legitimate business operations.

Very little investor money was deployed in productive investments, and when so deployed, the investments yielded meager income and were not profitable, or failed altogether. The Ponzi scheme was headquartered and based out of locations in Rochester, with a number of satellite offices around the country. Administrative and banking functions were largely performed out of Rochester. The conspiracy employed a variety of salespeople, including Parris and Santillo, who traveled around the country to meet with and solicit new investors.

Between January 2012 and June 19, 2018, Parris and Santillo obtained at least $115.5 million from approximately 1,000 investors. By the time the scheme collapsed in late-2017/early 2018, Parris and Santillo, doing business through an array of corporate entities, had returned approximately $44.8 million to investors as part of their scheme, but continued to owe investors approximately $70.7 million in principal.

Among the Rochester area victims of the Ponzi scheme were the following:

•    A resident of Webster, New York, who held a total asset value of $94,341.89 with a fictitious company known as First Nationle Solutions (FNS), which, as of Dec. 31, 2017, was in fact worthless or close to worthless; and
•    A resident of Victor, New York, and his wife, who invested approximately $221,758.67 with FNS and Middlebury Development. The couple received three payments of $2,500 but lost approximately $214,258.67.

Parris and Santillo controlled hundreds of different business bank accounts opened under numerous different business names at various financial institutions, including but not limited to Bank of America, Citizens Bank, Genesee Regional Bank and ESL Federal Credit Union. Santillo and Parris directed and authorized the transactions that occurred in the accounts, including deposits, withdrawals, check writing and funds transfers. The various bank accounts were used to transfer money from one account to another. Incoming investor money was routinely transferred through several accounts before the funds were finally spent on whatever purpose Parris and/or Santillo authorized. By moving investors' funds through various accounts in various entity names, Parris and Santillo were able to conceal and obscure the fact that new investor money was being used to repay earlier investors, finance the operations of the Ponzi scheme, and fund their lifestyles.

Santillo was previously convicted and sentenced to serve 210 months in prison.

The COVID-19 Fraud Scheme

Parris also pleaded guilty in a case originally charged in the U.S. District Court for the District of Columbia to defrauding the U.S. Department of Veterans' Affairs (VA), as well as at least eight other victim companies, in a scheme involving personal protection equipment (PPE). Between February and April 10, 2020, the defendant, as the owner and operator of Encore Health Group, a company based in Atlanta, that purported to broker medical equipment, offered to sell scarce PPE, including 3M-brand N95 respirator masks, to various medical supply companies and governmental entities. In these proposals, Parris knowingly misrepresented his access to, and ability to obtain and deliver on time, vast quantities of 3M N95 masks and other PPE. The defendant falsely represented that he was able to obtain 3M N95 masks directly from authorized sources in the United States, when in fact, he had no ready access to 3M factories or 3M N95 masks or other PPE, no proven source of supply, and no track record of procuring and delivering such items.

For example, in March 2021, Parris offered to sell the VA 125 million 3M N95 masks at a cost of $6.45 per mask. In this process, the defendant attempted to obtain an upfront payment of $3.075 million from the VA, even though he knew at the time that he had no access to the promised masks or present ability to deliver the promised masks.

As part of his guilty plea, Parris admitted that, in addition to attempting to defraud the VA, he actually obtained upfront payments totaling approximately $7.4 million from at least eight clients for 3M N95 masks that he knew he had no access to or present ability to obtain or deliver on time. Parris also admitted that the proceeds of the scheme totaled approximately $6,218,525. In total, Parris sought orders in excess of $65 million for the non-existent PPE equipment.

In the United States District Court for the District of Maryland an Indictment was filed charging Nader Pourhassan and Kazem Kazempour with one count of conspiracy to commit securities fraud and wire fraud, three counts of securities fraud, and two counts of wire fraud. Additionally, Pourhassan was charged an additional count of securities fraud, an additional count of wire fraud related to the COVID-19 scheme, and three counts of insider trading. Further, Kazempour was charged with one count of making false statements to federal law enforcement agents. As alleged in part in the DOJ Release, Pourhassan and Kazempour:

allegedly engaged in a conspiracy to defraud investors through false and misleading representations and material omissions relating to CytoDyn's development of leronlimab, a monoclonal antibody investigational drug also known as PRO 140, as a potential treatment for human immunodeficiency virus (HIV). Pourhassan and Kazempour allegedly deceived investors about the timeline and status of CytoDyn's regulatory submissions to the U.S. Food and Drug Administration (FDA) to artificially inflate and maintain the price of CytoDyn's stock and attract new investors, and for their personal benefit, including by selling their personal shares of CytoDyn stock.

Pourhassan was CytoDyn's president and CEO at the time of the alleged fraud. Kazempour is the co-founder, president, and CEO of Amarex Clinical Research LLC (Amarex), a private company with offices in Germantown, Maryland, that managed CytoDyn's clinical trials, and was CytoDyn's regulatory agent in interactions with the FDA. Kazempour also served on CytoDyn's Disclosure Committee, which was responsible for reviewing and approving CytoDyn's periodic filings with the U.S. Securities and Exchange Commission.
. . .
The indictment alleges that Pourhassan and Kazempour made and caused CytoDyn to make materially false and misleading representations about the timelines by which CytoDyn and Amarex would complete and submit CytoDyn's biologics license application (BLA) for leronlimab's treatment of HIV to the FDA. In April 2020, after CytoDyn and Amarex repeatedly missed publicized timelines, Pourhassan allegedly directed Kazempour and Amarex to submit the BLA - even if it was incomplete - so that Pourhassan and CytoDyn could announce to investors that the BLA had been submitted. Pourhassan and Kazempour allegedly knew that the FDA would refuse to review an incomplete BLA.

After Kazempour and Amarex allegedly submitted the incomplete BLA at Pourhassan's direction, Pourhassan and CytoDyn misrepresented in a press release that a "complete" BLA had been submitted to the FDA when, in truth and in fact, it had not. Pourhassan then allegedly sold millions of dollars' worth of CytoDyn stock based on material non-public information, including information about the fact that the BLA was, in truth and in fact, incomplete when submitted.
. . .
The indictment also alleges that Pourhassan made, and caused CytoDyn to make, materially false and misleading representations about CytoDyn's investigation and development of leronlimab as a potential treatment for COVID-19, including the results and significance of clinical trials and the status of CytoDyn's regulatory submissions to the FDA. Pourhassan allegedly knew that, in truth and in fact, leronlimab's clinical studies failed to achieve the results necessary to obtain any form of FDA approval for use as a treatment for COVID-19 and the results CytoDyn publicly touted were neither statistically significant nor scientifically sound. 
[P]ourhassan repeatedly issued press releases exaggerating CytoDyn's progress with regard to leronlimab, an antibody that was administered to patients in clinical trials to treat various diseases. The complaint alleges that, in an April 2020 press release, CytoDyn falsely announced that the company had submitted a completed Biologics License Application to the U.S. Food and Drug Administration-a key milestone that caused the company's stock price to increase. As set forth in the complaint, the FDA submission was woefully inadequate, and the FDA alerted the company of those deficiencies within days; however, Pourhassan did not alert shareholders to this information. In the meantime, Pourhassan allegedly sold approximately $15.8 million worth of CytoDyn stock based on the false information, netting profits of more than $4.7 million.

The SEC's complaint further alleges that Kazem Kazempour, CEO of a contract research organization that interfaced with the FDA on CytoDyn's behalf, signed off on the incomplete application and subsequently sold more than $420,000 of CytoDyn stock.
[O]i2Go Media Technologies, Inc., and Anthony Michael Hernandez, its CEO, sold securities in a Regulation A Offering despite not qualifying for an exemption from registration and raised approximately $1,317,000 from at least 750 investors. Oi2Go and Hernandez also allegedly made false and misleading claims in TV commercials and in materials posted on a website aimed at prospective investors regarding Oi2Go's current ability to stream media content. The TV commercials allegedly instructed viewers to call a number to invest and the phones were answered by individuals acting as unregistered brokers. The complaint alleges that Oi2Go and Hernandez aided and abetted these individuals and associated entities in acting as unregistered brokers. In addition, the SEC's complaint alleges that Hernandez misappropriated at least $456,000 in investor funds and used those funds to pay personal expenses such as travel, meals and jewelry.
A CFTC Order settled charges against futures commission merchant CHS Hedging LLC and required the FCM to pay a $6.5 million civil monetary penalty and undertake remedial measures As asserted in part in the CFTC Release: 

[F]rom January 2017 through December 2020, one of CHS Hedging's customers (Customer A) owned and controlled a ranching company and other related businesses, and engaged in speculative trading that sustained millions of dollars in losses in the ranching company's account at CHS Hedging. Customer A and the ranching company made net margin payments of more than $147 million to CHS Hedging over the course of those four years. According to the order, CHS Hedging accepted the margin payments from Customer A without adequately investigating the source of Customer A's funds or reporting Customer A's transactions in a Suspicious Activity Report to the Department of the Treasury. 

The order finds that Customer A's trading losses were facilitated by CHS Hedging's failure to impose and enforce appropriate trading limits on his account. The trading limits CHS Hedging imposed on Customer A's account were inconsistent with Customer A's financial resources and hedging needs. Customer A frequently exceeded his trading limits. CHS Hedging, at times, raised those limits, which allowed Customer A to continue his speculative trading and sustain more losses.

Moreover, the order finds that CHS Hedging failed to maintain certain required records for pre-trade communications and failed to produce certain required records promptly or in the form requested by CFTC staff.
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Related Filings

The Division of Enforcement charged Cody Easterday and Easterday Ranches with fraud and other violations of the Commodity Exchange Act (CEA) and regulations in Case No. 4:21-cv-5050, currently pending in the U.S. District Court for the Eastern District of Washington. [See CFTC Press Release No. 8372-21]

Cody Easterday pled guilty to criminal charges arising from the aforementioned scheme and was sentenced to 11 years in prison. 
Today, the Commodity Futures Trading Commission (Commission or CFTC) issued a complaint and settlement order involving CHS Hedging, LLC (CHS), a registered futures commission merchant (FCM).  The order details many egregious violations, including CHS's failure to comply with basic recordkeeping and supervisory obligations.

In the wake of the terrorist attacks on September 11th, Congress strengthened U.S. banking law. Section 5318(h) of the Bank Secrecy Act (BSA), for example, requires "financial institutions" to establish anti-money laundering (AML) programs and specifies that these programs must contain minimum standards and compliance requirements.  Under the statute and our regulations, FCMs are subject to AML obligations.  FCMs must implement reasonable procedures to verify the identity of any person seeking to open an account, to maintain records of the information used to verify the identity of transacting persons and to determine whether they appear on any lists of known or suspected terrorists or terrorist organizations.  CHS ignored obvious red flags and failed to implement fundamental risk controls required by banking laws and Commission regulations, leading to the systemic failures outlined in the Commission's order.

Where conduct is characterized by such pervasiveness, we must aim to calibrate penalties and remedial undertakings accordingly.  In instances where previous consequences have failed to effectively deliver the message, a more aggressive approach may be justified.  Over the last twenty years, CHS has acquired a lengthy record of repeated violations.  The Commission must begin to think carefully about additional approaches to deter this type of misconduct, particularly in contexts where the conduct is repeated in so many instances over so many years.  Let's ensure that penalties and remediation measures effectively deter repeat offenders.

I continue to be a strong proponent for strengthening rules pertaining to registered market participants.  A sharp focus on these rules is especially important where intermediaries perform a central role in properly functioning derivatives markets.  It is also critical to begin to think carefully about how we import these important rules and regulations in contexts where the market structure evolves away from reliance on traditional intermediaries.

As I previously noted in other market contexts, recordkeeping rules are essential to the Commission's oversight of market participants and the integrity of the derivatives markets.  CHS flouted these fundamental principles in its many failures to preserve transaction records.  Preserving records enables regulators to conduct surveillance and bring enforcement actions when appropriate-reducing fraud and market manipulation, protecting investors, and ultimately engendering authentic trust in our markets, which are preeminent globally.  Accordingly, I continue to promote enhanced customer protections, risk management programs, internal monitoring and controls, capital and liquidity standards, customer disclosures, and auditing and examination programs for futures commission merchants and other market participants that handle customer funds.

As a sponsor of the Commission's Market Risk Advisory Committee, I am deeply thoughtful about ensuring the Commission continues to focus on systemic risks that threaten the stability of the derivatives markets, which begins with ensuring that each market participant adheres to the established, well-tailored, fundamental rules.  I commend the diligent work of our Enforcement team, including Ashley J. Burden, Joseph Patrick, Ben Sedrish, Allison V. Passman, Scott R. Williamson, and Robert Howell, for their efforts in this matter.
One of the Commission's core functions is to ensure that derivatives markets have integrity and that there is no market manipulation and excess speculation that can artificially increase prices.  This function is particularly important since the pandemic, when families have faced hard choices at the grocery store given increased costs of food.  In order to prevent excessive speculation, the Commission requires limits on trader positions-limits set by exchanges, and enforced against market participants.  Brokers (referred to as futures commission merchants (FCMs)) serve as critical gatekeepers in preventing excessive speculation.

I support the Commission bringing an enforcement action against commodity broker and CFTC-registered FCM CHS Hedging, Inc. (CHS) for failing to implement anti-money laundering requirements and failing to prevent excess speculation (including during the pandemic) by Cody Easterday.  Chief Judge Bastian recently sentenced Easterday to 11 years in prison, saying that the case involves "the biggest theft or fraud I've seen in my career-and the biggest I ever hope to see."[1]  Easterday was a rancher who defrauded Tysons Food, Inc. and another company out of more than $244 million by charging them for approximately 265,000 head of cattle that did not exist (a.k.a. "ghost cattle").[2]

In 2021, the CFTC charged Easterday and Easterday Ranches, Inc. for fraud, making false statement to an exchange, and violating exchange-set position limits.[3]  Easterday accumulated more than $200 million in losses over a 10-year period from speculative trading in the cattle futures markets.[4]  Easterday devised the ghost cattle fraud scheme to generate money to cover margin calls on his millions in losses.[5]  The CFTC also charged him with defrauding the Chicago Mercantile Exchange ("CME") in 2017 and 2018 to avoid disciplinary actions after exceeding position limits on cattle markets, and with violating position limits.[6]

Easterday's commodity broker CHS was in a position to stop violations of position limits, and stop or significantly reduce the fraud, but CHS violated its duties and the law.  During the relevant period, Easterday made net margin payments of more than $147 million to CHS.  CHS accepted these payments despite knowing that the financial statements that CHS requested from Easterday showed no cash or cash equivalents, substantially no short-term assets in excess of liabilities, negative or break-even cash flow, and drawn down credit lines.  Some of the margin payments exceeded Easterday's entire net annual operating income.  CHS did not investigate the source of the funds, implement an adequate anti-money laundering program or implement risk-based trading limits on Easterday.  CHS disabled trading limits for Easterday, and even raised limits.  CHS provided Easterday with direct market access, but intentionally circumvented automatic pre-trade order screening on his account, allowing him to routinely exceed trading limits.

CHS ignored many red flags, including an independent audit that found that CHS should cease relying on the "type of customers it services, or the length of customer relationships to detect, investigate and report suspicious transactions that might constitute money laundering violations."  CHS failed to act on the auditor's recommendation.  CHS also failed to maintain pre-September 2019 communications between its salesperson and Easterday.

I applaud the CFTC enforcement staff for bringing this case against a key gatekeeper who failed to uphold its regulatory responsibilities and in so failing, violated the law.  Unfortunately, this is not the first time that CHS has failed to follow laws and rules to uphold it regulatory responsibility.

CHS is a recidivist.  There have been 22 enforcement actions by exchanges and the CFTC brought against CHS.  Many of these involved failures related to record-keeping and reporting, including position reporting.  In 2016, the Commission brought a $1 million enforcement action against CHS for 13 years of misreporting fixed cash positions, which are related to position limits.[7]

While I support the Commission bringing an enforcement action against CHS Hedging, I do not support bringing this action as presented to the Commission because it does not bring sufficient accountability for or transparency to the harm caused by the broker's illegal conduct.  The complaint should identify Easterday's criminal and civil violations of the law.  The Commission should bring a very strong enforcement action against this broker-not one that does not fully describe the full scope and impact of the harm that could have been stopped or minimized had CHS legally executed its duties as a FCM, and harm that flowed.  Providing the identity of Easterday and the multiple federal actions against him would provide significant transparency into real harm involved in this case.  I see no valid reason to not reveal his identity or spare CHS of the consequences of its illegal actions-reputational or otherwise.

A key part of the CFTC's mission is to promote market integrity and enforce our anti-money laundering requirements to promote market integrity.  When one of our registrants violates these requirements for a favored customer, particularly in the face of compelling evidence of suspicious activity by that customer concerning the source of funds, we need to send a stronger message than what we are doing in this case.

I also do not support this settlement because it does not send a strong enough deterrent message.  While a penalty of $6.5 million is significant for CHS based on its size, I cannot support the settlement without requiring the defendant to admit to its illegal actions.  Requiring defendant admissions in CFTC enforcement actions serves the critical public interest goals of federal law enforcement programs-justice, accountability, and deterrence.[8]  I recently proposed the Heightened Enforcement Accountability and Transparency test (HEAT Test) to assist the Commission in assessing whether specific cases demand heightened justice for victims, heightened accountability, and heightened deterrence that would accompany defendant admissions.  This would include cases with one or more of the following factors:

  • Egregious conduct;
  • The presence of a criminal scheme;
  • Significant harm or risks of harm to investors and/or market participants;
  • Significant harm or risks of harm to market integrity;
  • A recidivist defendant;
  • Obstruction, lying or concealment, in an investigation/examination by the CFTC, other federal authority on the same conduct, or a self-regulatory organization; and/or
  • The need to send a pronounced message about particular conduct or practices.

Several of those factors exist in this case.  CHS is a recidivist.  There was significant harm to the market and market participants that flowed from CHS's violations.  There is a significant need for the CFTC to send a pronounced message about an FCM violating CFTC requirements to prevent excessive speculative trading, including during the pandemic.  I issued a statement that the CFTC must ensure that excessive speculation does not distort and worsen existing challenges in commodities markets.[9]  Out of concern that families and businesses may pay artificially increased prices for commodities, I called for the CFTC to conduct deep dive studies into market manipulation and excessive speculation in commodities markets.  As an FCM, CHS violated its legal responsibilities to prevent excessive speculation and to implement an anti-money laundering program, something they should admit for full accountability, transparency and deterrence.

[1] Eastern District of Washington | Tri-Cities Rancher Sentenced to Eleven Years in Federal Prison and Ordered to Pay $244 Million in Restitution for "Ghost Cattle" Fraud | United States Department of Justice.

[2] See Id.

[3] CFTC Charges Washington State Rancher and Feedyard with $233 Million Phantom Cattle Fraud Scheme | CFTC.

[4] See Id.

[5] See Id.

[6] See Id.

[7] In re CHS, Inc., CFTC No. 16-07, 2016 WL 913367 (Mar. 9, 2016) (consent order).

[8] Commissioner Christy Goldsmith Romero, Statement of Commissioner Christy Goldsmith Romero: Proposal for Heightened Enforcement Accountability and Transparency in Settlements | CFTC (September 19, 2022).

[9] See Opening Statement of Commissioner Christy Goldsmith Romero Before the Energy and Environmental Markets Advisory Committee, Opening Statement of Commissioner Christy Goldsmith Romero Before the Energy and Environmental Markets Advisory Committee | CFTC (September 20, 2022).
In a FINRA Arbitration Statement of Claim filed in January 2020 and as amended, associated person Claimant Barkow asserted breach of contract; violations of Article 6 of the New York Labor Law; unjust enrichment; breach of implied covenant of good faith and fair dealing; and fraud. At the hearing, Claimant sought $7,555,480.86 in damages. Respondents generally denied the allegations and asserted affirmative defenses. The FINRA Arbitration Panel denied Claimant's claims against Respondents Alagna and Stein; however, the Panel found Respondent Joseph Gunnar & Company LLC liable to and ordered the firm to pay to Claimanat Barkow the following sums plus interest:
  •  $65,389.82,
  • $206,268.02,
  • $560,877.04
  • $319,721.03, 
  • $224,239.76, 
  • $25,872.00, and
  • $151,875.00.
Additionally, the Panel awarded this Declaratory Judgment:

Respondent Joseph Gunnar & Co. LLC shall pay Claimant 75% of an amount derived in a method consistent with Claimant's calculations of other damages at the hearing, within thirty days of any and all liquidity events (as the terms was used by all parties at the hearing sessions) for transactions involving Prosper Marketplace, Virgin Hyperloop I, and Zocdoc. 

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After a guilty verdict is rendered in a criminal trial, a convicted defendant often battles on via appeals. For some, it's about delaying the inevitable incarceration and fines; for others, it's a belief that the law was not followed. Following a 2018 conviction for both conspiracy to commit securities fraud and securities fraud, one defendant battled on and on . . . and on. As the last month of 2022 fades, the convicted insider trader lost yet another appeal; however, as the calendar turns to 2023, perhaps there will be more appeals to come.
UOP LLC d/b/a Honeywell UOP agreed to pay more than $160 million to resolve parallel bribery investigations by criminal and civil authorities in the United States and Brazil; and Honeywell UOP entered into a three-year Deferred Prosecution Agreement ("DPA") in connection with a criminal information filed in the United States District Court Southern District of Texas charging the company with conspiracy to violate the anti-bribery provisions of the Foreign Corrupt Practices Act ("FCPA"). As alleged in part in the DOJ Release:

[B]etween 2010 and 2014, Honeywell UOP conspired to offer an approximately $4 million bribe to a then-high-ranking executive of Petróleo Brasileiro S.A (Petrobras) in Brazil. Specifically, Honeywell UOP offered the bribe to secure improper advantages in order to obtain and retain business from Petrobras in connection with Honeywell UOP's efforts to win an approximately $425 million contract from Petrobras to design and build an oil refinery called Premium.
. . .
According to court documents, in order to effectuate the bribery scheme, Honeywell UOP entered into an agency agreement with a sales agent for the purpose of funding and paying the $4 million bribe to the high-ranking Petrobras executive. In exchange for the bribe, and after obtaining business advantages, including inside information and secret assistance, from the Petrobras executive, Honeywell UOP won the contract. Honeywell UOP earned approximately $105.5 million in profits from the corruptly obtained business. 
. . .
Pursuant to the DPA, Honeywell UOP will pay a criminal penalty of approximately $79 million. The department has agreed to credit up to approximately $39.6 million of that criminal penalty against amounts the company has agreed to pay to authorities in Brazil in connection with related proceedings to resolve an investigation by the Controladoria-Geral da União (CGU), the Ministério Público Federal (MPF), and the Advocacia-Geral de União (Attorney General's Office). In addition, Honeywell UOP will pay approximately $81 million in disgorgement and prejudgment interest as part of the resolution of a parallel investigation by the SEC. 
. . .
As part of the DPA, Honeywell UOP has agreed to continue to cooperate with the department in any ongoing or future criminal investigations relating to this conduct. In addition, under the agreement, Honeywell UOP and its parent company, Honeywell International Inc., agreed to continue to enhance its compliance program and provide reports to the department regarding the implementation of compliance measures for the term of the DPA.

The department reached this resolution with Honeywell UOP based on a number of factors, including, among others, the nature and seriousness of the offense. Honeywell UOP received full credit for its cooperation with the department's investigation, which included, among other things, (i) proactively disclosing certain evidence of which the department was previously unaware; (ii) providing information obtained through its internal investigation, which allowed the department to preserve and obtain evidence as part of its own independent investigation; (iii) making detailed presentations to the department; (iv) voluntarily facilitating interviews of employees; and (v) collecting and producing voluminous relevant documents and translations to the department, including documents located outside the United States. The company promptly engaged in extensive remedial measures including, among other things, terminating and disciplining certain employees involved in the misconduct and strengthening its compliance program. In light of these considerations, the criminal penalty calculated under the U.S. Sentencing Guidelines reflects a 25% reduction off the bottom of the applicable guidelines fine range. 

Honeywell International Inc. consented to an SEC Order charging it with violating the anti-bribery, books and records, and internal accounting controls provisions of the Securities Exchange Act. The SEC Order provides for an offset of up to approximately $38.7 million of any payments made to Brazilian authorities; and, accordingly, a minimum payment to the SEC of about $42.4 million. As alleged in part in the SEC Release:

The SEC's order finds that Honeywell, a U.S.-based global manufacturer of aerospace, building technologies, and automation products, engaged in a bribery scheme involving intermediaries and employees of its U.S. subsidiary to obtain business from the Brazil state-owned entity Petrobras. Specifically, the order finds that, in 2010, Honeywell offered at least $4 million in bribes to a high-ranking Brazilian government official in connection with the bidding process at Petrobras. The SEC's order also finds that, in 2011, employees and agents of Honeywell's Belgian subsidiary paid more than $75,000 in bribes to an Algerian government official to obtain and retain business with the Algerian state-owned entity Sonatrach.

Chandler Man Sentenced to 33 Months for Defrauding Investors (DOJ Release)
In the United States District Court for the District of Arizona, a jury found Jeffrey D. McHatton, 68, guilty on 10 counts of securities fraud; and he was sentenced to 33 months in prison. As alleged in part in the DOJ Release:

One of McHatton's co-defendants at trial, Robert Sproat, 60, of Mesa, Arizona, was previously sentenced to 30 months in prison. Prior to trial, a third co-defendant, Robert Moss, 56, of Gilbert, Arizona, pleaded guilty to his involvement in the scheme and was sentenced to 30 months in prison.

Evidence presented at trial demonstrated that, between 2012 and 2014, McHatton, Sproat, and Moss used a religious charitable organization as a front to entice victims to invest over $1.2 million. Several of the victims targeted in the scheme were elderly. McHatton, Sproat, and Moss fraudulently promoted investments in the recovery of low alpha lead from Central America, gold from the Philippines, and diamonds from Africa, though none of the items were ever produced. McHatton, Sproat, and Moss used large portions of the investment funds for their own personal use. The victims never received a return on investments other than minimal "interest" payments derived from other victims' money.

U.S. Attorney Announces Arrest Of Lamor Whitehead For Fraud, Extortion, And False Statements (DOJ Release)
As alleged in part in the DOJ Release:

LAMOR WHITEHEAD, who leads a church in Brooklyn, New York, has engaged in a  course of conduct in which he sought money and other things of value from victims on the basis of either threats or false promises that the victims' investments would benefit the victims financially.  First, WHITEHEAD induced one of his parishioners to invest approximately $90,000 of her retirement savings with him but instead spent the investment on luxury goods and other personal purposes.  Second, WHITEHEAD extorted a businessman for $5,000, then attempted to convince the same businessman to lend him $500,000 and give him a stake in certain real estate transactions in return for favorable actions from the New York City government, which WHITEHEAD knew he could not obtain.  In addition, when speaking with FBI agents who were executing a search warrant, WHITEHEAD falsely claimed that he had no cellphones other than the phone he was carrying when, in fact, WHITEHEAD owned a second phone, which he regularly used to communicate - including to send a text message describing it as "my other phone" shortly after telling the agents he had no other phones.

SEC Charges Undisclosed Control Person and His Alter-Ego Entity in Penny Stock Scheme (SEC Release)
In the United States District Court for the Southern District of New York, the SEC filed a Complaint, charging Brian Kistler and New Opportunity Business Solutions, Inc. a/k/a NOBS with violations of Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act and Rules 10b-5(a) and (c) thereunder. Also, Kistler was charged with a violation of the anti-manipulation provisions of the Exchange Act under Section 9(a)(2). As alleged in part in the SEC Release:

[B]etween approximately February 2018 and July 2018, Kistler and his alter-ego entity, NOBS, engaged in a fraudulent scheme to take control of Williamsville, a dormant microcap shell company, and deceitfully pump up the purported value of the company and its shares in order to "flip" the company and/or its shares for a profit. According to the complaint, to carry out the scheme, Kistler made false and misleading statements to OTC Markets Group, the Financial Industry Regulatory Authority ("FINRA"), and Williamsville's transfer agent.  Kistler also allegedly made false and misleading statements to the public through Williamsville's public filings. In addition, according to the complaint, Kistler engaged in manipulative purchases of Williamsville stock in order to give the appearance of bona fide market activity in the stock.  As alleged in the complaint, Kistler and NOBS benefited from this scheme.  Specifically, Kistler, through NOBS, received $50,000 for brokering the sale of Williamsville, and NOBS received 100 million Williamsville shares.  Kistler also received $32,500 to engage in manipulative purchases of Williamsville's stock.

Order Determining Whistleblower Award Claims ('34 Act Release No. 34-96527; Whistleblower Award Proc. File No. 2023-21)
The SEC's Claims Review Staff ("CRS") issued a Preliminary Determination recommending a Whistleblower Award of over $29 million to Claimant on the Covered Action and over $8 million in a Related Action. The Commission ordered that CRS's recommendations be approved. The Order asserts in part that [Ed: footnotes omitted]:

[While Claimant, an outsider to the company, did not first submit the information to the company, Claimant made persistent efforts to bring the conduct to the attention of the Commission as well as the company. Further, the principal objective of Rule 21F-4(c)(3) - to encourage internal reporting, thereby allowing a company the opportunity to address the conduct - was satisfied here. Quickly after Claimant submitted the email to the company, the company opened an internal investigation, hired outside counsel to conduct the investigation, and reported the allegations to the Commission. It would be in the public interest and consistent with the protection of investors to waive the first requirement of Rule 21F-4(c)(3) as to Claimant's award application for both the Covered Action and the Related Action.

In applying the facts under Rules 21F-6(a) and (b), we find the recommended award percentages to be appropriate. Claimant's initial anonymous tip to the company was the initial source of the company's internal investigation, as well as both the Commission's and Other Agency's investigations. Claimant submitted multiple anonymous tips to both the company and the Commission throughout the course of the investigations. The resulting Covered and Related Actions, however, addressed misconduct broader than that reported in Claimant's tips and a large percentage of the monetary sanctions ordered against the company related to conduct other than the violations alleged by Claimant. Further, Claimant's level of contribution to the Covered Action was higher than to the Related Action, as Claimant's specific allegations were not included as part of the charges in the action brought by the Other Agency.